Int'l trade, policy gauge

Int'l trade, policy gauge

C. Stuart Callison, Economist, Jakarta

The June 12th edition of The Jakarta Post carried an op-ed
piece by Alan Tonelson, research fellow, U.S. Business and
Industry Council Education Foundation, indicating it came from
the Washington Post. The headline announced that "Foreign trade
(is) not a universal panacea" to reduce poverty abroad and reduce
an inclination toward violence and terrorism, as America's
leaders believe -- although a later quotation indicates the
American position is simply that trade will "help" provide
answers, not that it is viewed as a panacea.

Having thus set up a straw man, Tonelson argues that the rapid
increase in trade during the 1990s has not had a positive impact
on wages or poverty "alleviation" and therefore trade cannot be
relied on to "drain the swamp" of terrorists.

Leaving aside observations of other analysts that most of the
world's terrorists come not from the poorest elements of society,
but rather from a literate, unfranchised middle class, Tonelson's
analysis of the impact of trade is deficient and misleading.

His key examples come from a Werner International survey of
wage rate history in the apparel industry, claiming real wage
rates declined in the 1990s while apparel exports increased many-
fold, citing data from Pakistan and Mexico. However, he ignores
the concurrent many-fold increase in the numbers of workers
employed. That those workers chose to work in the apparel
industry indicates they could earn more there than in alternative
employment opportunities.

Poverty was therefore reduced in many thousands of households
by the new jobs created by expanding exports. This effect surely
overwhelmed the impact of a percentage drop in real wages for
those who already held such jobs, whatever the cause of that drop
(real wages are expected to fall where the total labor force
grows faster than job creation).

Tonelson then cites evidence that real wages fell, during this
same period of economic and export expansion, across all economic
sectors in China, Indonesia and the Philippines as further
buttressing his thesis. He observes that "the developing world
is drowning in labor" and that the "worldwide labor glut
depresses the value of workers," while globalization has
increased competition among countries pursuing export-led growth
strategies, at a time when "the U.S. market is already saturated
with imports." So, he asks, "How much more export growth can
take place..?"

At least some of his data is simply wrong. Real wages in
Indonesia increased 5-6 percent annually from 1990 to 1997, while
modern sector employment grew dramatically. Further analysis
would have revealed significantly higher employment growth and
greater declines in poverty rates in the more export-oriented
economies (like Korea, Malaysia, Thailand, Indonesia), compared
with countries less open to world trade.

But of course it is precisely the huge overhang of workers
looking for better jobs that keeps real wages low. The only way
to increase real wages across all sectors, in a country with high
unemployment and underemployment and low traditional/informal
sector productivity, is first to achieve full employment in
productive sectors (not with public make-work activities). When
employers have to bid against each other for more workers, real
wages will rise on a sustainable basis. Growth in labor-
intensive export industries is an important contributor to this
process by providing more jobs at whatever the current market
wage rates are.

The U.S. is a major export market for developing countries,
and as its per capita income and GDP continue to grow, its
imports will continue to grow. The economies of many other
countries around the world are growing, and despite the import
restrictions Tonelson mentions, their markets for developing
country exports will also continue to grow. The hallowed
economic principle of comparative advantage will even work to
increase two-way trade with the likes of China, to the benefit of
all sides, and fear of overwhelming Chinese economic competition
is misplaced.

However, while export growth can help a country increase
employment and earn foreign exchange, an export policy
orientation is more important than that. Most of a country's
resources -- labor, land and capital -- are devoted to production
for the domestic market. An export policy orientation directs
investment into those activities that make better use of more
abundant domestic resources, such as labor and land instead of
scarcer capital -- into efficient import substitution, for
example, in addition to export production -- thereby providing
more jobs per unit of investment than would protected capital-
intensive industries.

In the effort to reduce poverty this is probably the most
important impact of trade-oriented economic policies -- directing
domestic and foreign investment alike into those activities that
create more productive jobs for the nation's workforce until full
employment, and the consequent sustained increase in real wage
rates, can be achieved. The growth of foreign trade is thus a
policy barometer for all economic activities, and not simply an
end in itself.